Uncategorized

Non-QM RMBS grows and stretches

| April 4, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Rapid growth in issuance of non-QM RMBS has started to stretch the boundaries of the sector. Issuance has quadrupled so far this year from the same time last year, but growth has come with an increasing population of high LTV loans, higher borrower debt-to-income ratios and more loans with limited or alternative documentation. Borrower credit scores remain strong, and increased tail risk shows up in some but not all major non-QM issuers. Fortunately, spreads in the sector have widened, adding some cushion for the added loan risk.

Rising loan-to-value

Rising LTV ratios are not unique to the non-QM market. Robust home price appreciation over recent years has driven average LTV ratios higher across agency MBS and CRT as well as private-label prime jumbo deals. Simply looking at average original LTVs in non-QM trusts, however, does not show any material rise (Exhibit 1).

Exhibit 1: Average original LTV across non-QM trusts

Source: Amherst Insight Labs, Amherst Pierpont Securities

The distribution of loans by LTV and vintage tells a different story, however. Populations of 80-90 LTV loans have risen from 18% of all collateral backing non-QM trusts in 2016 to 27% of total collateral in 2018. Most of the rise in higher LTV loans has been at the expense of 60-70 loans, which have fallen from 23% of total collateral in 2016 to just 19% of all loans last year. While the amount of high LTVs loans continues to grow, it does not appear to be at any expense to the quality of those loans as FICO scores have been consistently in the low 700s across vintages.

Exhibit 2: Non-QM issuance by vintage and original LTV

Source: Amherst Insight Labs, Amherst Pierpont Securities

Looking across the four largest non-QM issuers, the most pronounced increase in 80-90 LTV loans come from the Angel Oak, Caliber and Deephaven shelves with a much smaller bump in Invictus’ VERUS shelf (Exhibit 3). While Caliber’s COLT shelf has seen the largest increase in high LTV loans, COLT has also seen the most pronounced increase in credit scores on those loans, rising from an average of 702 in 2016 to 715 last year.

Exhibit 3: Original LTV distribution by issuer and vintage

Source: Amherst Insight Labs, Amherst Pierpont Securities

Higher debt-to-income

Higher DTI loans have also become a larger part of non-QM loan collateral. Loans with debt-to-income ratios greater than 40 made up 31% of all loans in non-QM trusts in 2016 and 44% of all loans last year (Exhibit 4). A few details:

  • Loans between 45 to 50 DTI made up an additional 8% of 2018 collateral, but average FICO scores jumped by 13 points from 696 to 709.
  • Loans between 50 to 55 DTI rose by 4% but FICO scores remained flat, potentially raising concerns about layered risk in high DTI loans.

Exhibit 4: Non-QM issuance by vintage and DTI

Source: Amherst Insight Labs, Amherst Pierpont Securities

Caliber’s COLT shelf saw the largest percentage increase in 40 to 45 DTI loans, increasing from 8% of 2016 collateral to 27% of loans securitized in 2018. While the shelf had the most dramatic increase in those loans, they had an average FICO score markedly higher than those with comparable DTIs in other programs. Looking at that DTI bucket across the four major issuers in 2018 Caliber’s loans had an average FICO of 721, markedly higher than those of Angel Oak, Deephaven or Verus who’s comparable loans had average FICO scores of 703, 696 and 704 respectively. (Exhibit 5)

Exhibit 5: Debt-to-income ratio distribution by issuer and vintage

Source: Amherst Insight Labs, Amherst Pierpont Securities

More limited or alternative documentation

Over the past two years the population of full documentation loans has been giving way to limited documentation or loans underwritten using other methods like asset depletion or debt service coverage to qualify. The population of full doc loans in non-QM trusts tends to be volatile making up as much as two thirds of early issuance and less than a quarter of loans securitized in 2017.

Unfortunately, underwriting and documentation across shelves with the most alternative documentation are not uniform and as such it makes it somewhat challenging to make truly equivalent comparison of risks in limited or alternative documentation loans. Simply looking at 2018 issuance would suggest that limited and alternative documentation loans in Invictus’ VERUS program may be the least risky given an average 720 FICO and 67 original CLTV. Slightly better than Deephaven’s limited documentation loans that had an average 712 FICO and 72 origial CLTV. Non-full doc loans in the COLT and Angel Oak programs had average FICOs of 709 and 705 and original CLTVs of 78 and 79 respectively.

Compensation for risk

This leads to the question of whether the changing risk profiles of these pools are being priced accordingly. We do not expect the changing collateral profiles of these deals to impact the AAA classes of these deals from a loss perspective, any material deterioration in collateral performance would impact the AAA classes from a mark to market perspective. Looking at the historical spread relationship between non-QM AAA bonds and current coupon 15-year pass- throughs, a comparable duration agency asset, shows that currently non-QM AAA spreads are roughly 25 bps wider than they were to that agency benchmark this time last year suggesting that the market has commanded a meaningful incremental risk premium for the changing credit profile of the asset class on a relative basis. (Exhibit 6)

Exhibit 6: Average spread between non-QM AAA and current coupon 15-year

Source: Amherst Insight Labs, Amherst Pierpont Securities

admin
john.killian@santander.us
1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles